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In an exclusive interview with 7investing, Daniel Joshua Rubin talks about how the stories companies tell matter, especially for shareholders, and that one of the most important qualities of a company's leadership team is being able to effectively craft its own narrative. Throughout the conversation, Rubin gives numerous examples of companies with simple and complex narrative arcs, good and bad stories.
December 10, 2020 – By Samantha Bailey
Is there a difference between investing in story stocks and stocks with great stories? Author Daniel Joshua Rubin thinks so. Rubin is best known for his writing gigs in television and theater, and his new book, 27 Essential Principles of Story. Through his online workshops, teaching engagements at universities, and his own website, Story 27, Rubin has established himself as a recognized authority on the art of storytelling.
Yet what many might not know, is that Rubin is also an accomplished investor. After suffering through the good-intentioned, but ultimately unsatisfying and expensive advice of financial advisors for years, Rubin realized he could do a better job by personally taking control of his family’s investments. Setting out as a individual investor was unnerving until he realized that by interpreting stocks’ narratives he could invest without necessarily knowing all of the ins-and-outs of its balance sheet and cash flow statements.
Rubin believes that narrative is essential to the human experience, making a company’s story particularly important to investing, but that narrative investing – as Rubin calls it – makes many investors uncomfortable because it deals in intangibles and x-factors, not cold hard numbers on a spreadsheet.
In an exclusive interview with 7investing, Rubin talks about how the stories companies tell matter, especially for shareholders, and that one of the most important qualities of a company’s leadership team is being able to effectively craft its own narrative. Throughout the conversation, Rubin gives numerous examples of companies with simple and complex narrative arcs, good and bad stories.[su_button url="/subscribe/" style="flat" background="#84c136" color="#ffffff" size="6" center="yes" radius="0" icon="" icon_color="#ffffff" desc="Get full access to our 7 best ideas in the stock market for only $49 a month."]Sign Up Today! [/su_button]
Along the way, we discuss stocks such as Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Square (NYSE:SQ), and Tesla (NASDAQ:TSLA), before Rubin brings it all together in a great story from the television show Shark Tank.
1:14 – Daniel’s book – “27 Essential Principles of Story”
7:58 – Why is the concept of story so important?
10:53 – How Daniel became interested in investing
14;14 – “Narrative Investing”
17:02 – Story stocks vs investing in stocks with great stories
24;29 – Slack and Fastly and how to decipher which stocks will succeed
28:00 – Why simplicity has value to us as investors
31:55 – One of the many things Jeff Bezos did right
35:43 – Daniel’s Shark Tank story
38:12 – When is it like great optionality? And when is it the worst suffocation?
41:17 – Matt and Daniels differing opinions on Square
45:24 – Matt’s comfort with bigger market caps
48:01 – How Daniel got his daughter interested in investing
Matthew Cochrane 0:00
Greetings, fellow investors. I’m Matthew Cochran, Lead Advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members, and educational content that is freely available to everyone. Listeners, today I am very excited to introduce Daniel Joshua Rubin, the author of the newly published book, “27 Essential Principles of Story”. He is an experienced writer who has written for mediums such as TV, theater, he has written online articles, and he’s taught writing courses at many universities, which begs the question, what is he doing on an investment podcast? Well, as it so happens, I have talked with Daniel, first on investment discussion boards, and now on Twitter, mostly through DM’s for years, and what he manages to keep secret from many people is how savvy of an investor he is. And today you are in store for a special treat. We’re going to discuss how Daniel applies the principles of narrative of story to his investment process. And I think it’s going to be a little bit of a different show (and) I think it’s going to be fun. So let’s get started. Daniel, welcome to the show!
Daniel Joshua Rubin 1:11
Hey, Matt, thanks a lot for having me. I’m really excited to talk about this.
Matthew Cochrane 1:14
Yeah, absolutely. Daniel, I’m gonna ask our listeners to indulge us for just a couple of minutes. I promise listeners, we’re gonna keep this part quick. But before we get to investing, let’s quickly discuss your book, “27 Essential Principles of Story”. I have read it cover to cover, (and) I thoroughly enjoyed it. Why don’t you give us a quick summary of the book and why you thought it was necessary to write it?
Daniel Joshua Rubin 1:37
Sure. You know, it’s funny from an investing standpoint, I’m a very big Charlie Munger fan. I love his plain spoken principles, his mental models. And I realized I had a kind of confluence of events where I was working in Agricultural Risk Management for a little bit, and I was a big fan of UFC. I have a lot of friends who are musicians, and all these things kind of came together where I realized that the best people in anything – in whatever they do, whether it’s martial arts, or writing, or investing, or building chairs, being a carpenter, they have fundamental principles that they stick to. And Charlie Munger has talked a lot about how when you are just not stupid, that’s better than being brilliant. It’s when you get all the fundamentals righs, he talks about how in an investment, you get what he calls a Lollapalooza effect. Where the the sum, the whole, is greater than the sum of the parts. And I had taken a break from writing, and I had a regular 9-5 job. And I started getting the passion to write again. So I kept a notebook of principles, just the most fundamental basic principles. And I was raised in New York, and I lived in LA, but now I’m a humble Midwesterner. And I really do think there’s a lot of truth to the idea that Midwestern people are very plain spoken, have a lot of humility, (and) they’re not ostentatious. And I wanted to strip all the jargon out of the language of teaching story. You know, there’s a lot of terms that they use in storytelling, like crisis and climax and inciting incident on these terms that don’t necessarily articulate what the thing is. So I built this notebook of simple plain English principles. And it was just for me to help my writing. But as I started developing it, I started thinking “this is pretty good. Like this would be a good foundation for a school”. And I thought I’d self publish maybe a little book to go with my Writing Studio in Evanston, because I’d rather teach it my way than be part of the big university. And I think I could do it a lot cheaper. Sure enough, because I had no intentions of being a big shot with this. I happen to call an agent, who’s a big agent, who’s represented a friend of mine who wrote a great book called “The Personal MBA.” And sure enough, she loved the book and signed me right away, and then sold the book. And I know had I desperately wanted to sell the book, I never would have sold the book. But somehow – I don’t know how the universe works that way. But anyway, so I just wanted to make it as simple as possible and get back to the basics that Aristotle was talking about 2500 years ago -, plot, character, theme, dialogue, setting, and that’s what I did.
Matthew Cochrane 4:41
Well, you did a great job. I read lots of books about writing, because I want to be a clear, effective writer. And, you know, they’re usually good, but most of them are very dry. But this wasn’t at all. You included examples, like you drew from movies and classic books, to Comic Con, to rap songs, and it just really enlivened the book. How did you come up with all the examples in the book, and give us an example of one of your favorites?
Daniel Joshua Rubin 5:10
Sure. Um, oh my God, I’m not joking around, the book took really about four years. And one of my problems in my career was that I wanted to do too many different things. And one things we’re going to talk about a lot today is the power of focus….I got my brain just shocked, you asked me that question again. Sorry!
Matthew Cochrane 5:33
Just like, maybe like one of your favorite examples of, like, the stories you included in your chapters, because every single chapter, I mean, you had 27 principles, and there’s I think 27 chapters. And every single chapter had a different example of a story. Like it was, like, from Shakespeare to South Park, to two Netflix shows. What was maybe like your favorite example of a story you included?
Daniel Joshua Rubin 6:01
It’s funny man, that’s like asking me which kid I love the best. But in ways, I think that my favorite one is probably a principle called write characters to the top of their intelligence. And again, what I want to do is kind of get to like, Elon Musk talks a lot about first principles, like the most very basic foundational things you need. Like, if you’re building a car, you don’t necessarily have to have a steering wheel, you have to have a mechanism to steer the car. So the first principle is you need steering. So like one of my favorite first principles of writing is you absolutely have to write characters to the top of their intelligence. So I broke down the song Stan. Eminem’s song, Stan, it’s an iconic song. Stan is an is an archetype of the obsessed fan. And when you break that song down line by line, you see that every single thing Stan does, is not only intelligent, it’s kind of brilliant. And he really attacks the mind of Eminem through the song. So I think that when you’re telling a story, if every single character is at the top of their game, you’re objectively, factually, going to have a much, much better story. Except the thing is, it forces you to be a much better writer, you know, you got to dig deep, to make sure everyone’s at the top of their game. So I’d say that was a really good one.
Matthew Cochrane 7:25
A couple things there. I enjoy writing, obviously, and one of the things I’ve always thought in the back of my head is like, “one day, I’m gonna write. Maybe I’ll try to write a novel or something like that.” You know, like years in the future. I’ll just try. Reading your book, I’m like, this is a lot harder than I was kind of giving it credit for, like coming up with our story. And it made me appreciate more the process that goes into writing a great story.
Matthew Cochrane 7:58
Daniel, why is the concept of story so important to us? As humans, as people, why is narrative so essential to the human experience?
Daniel Joshua Rubin 8:09
Sure. There’s two two things have a huge impact on me about this. As I was developing the book, I knew story was critically important. But to be honest, through the course of writing a book, it went exponentially higher than ever thought. So E.O. Wilson, famous biologist, has a an essay called The Power of Story. And what he talks about is as a human being, as you move through the world, you’re processing so many sights and sounds and images and feelings and things, that if you couldn’t form narratives, you couldn’t make sense of what’s going on. (Also) the book Sapiens: A Brief History of Humankind by Yuval Hariri, that just blew me away, because what he talks about is if you look at companies, nations, marriages, religions, the best stories that we tell are not necessarily provable, objective facts. They’re kind of things we agree to, in a sense that like, my wife and I are married, you know, we have a certificate that says we’re married, but it’s not necessarily an objective fact. Like, if tomorrow she wakes up and goes “you know, we’re actually not married”, then we’re not married anymore. Or if tomorrow, they change the borders between Canada and America, well, then, the nation changes. If they put a different flag and name it something different, then it’s it’s a different thing. If you look at religion, I mean, look at Christianity. The story of Jesus is so fantastically well told, is a powerful main character, and he has a clear narrative, his death is unbelievably compelling, it’s filled with meaning, and it’s not an accident that that’s the biggest religion in the world. Or if you look at politics now, like I thought in the first election, and again, I’m not going to drag us into politics-
Matthew Cochrane 10:07
Be careful, be careful.
Daniel Joshua Rubin 10:08
I will, I promise! But I really think this feels kind of objective to me, and I’m not making any value judgments. I just think Trump’s story in 2016 was much sharper than it was in 2020. Meaning he said, I alone can fix it, and build the wall and make America great again. And it had a certain consistency. Whereas Keep America Great Again, in the middle of a pandemic, was a problematic message. Not that he didn’t get 70 million votes. But anyway, so this narrative shapes, you know, our lives, our religions, our marriages, our nations, our corporations. It’s just, it’s absolutely essential to being a human being.
Matthew Cochrane 10:53
Sure, sure. All right. And now listeners, I promised the rest of the show is going to be about investing. But thanks for indulging us there, because that sets the stage for everything else. Daniel, let’s move on to your experience as an investor. How did you first come to be interested in value investing? And just tell us like your journey or evolution, if you will, as an investor?
Daniel Joshua Rubin 11:13
Absolutely. I’m glad you said what you just said about this is going to be very, very relevant, and frankly speaking, and I hope this isn’t obnoxious, but getting clear on how narrative works. Investing has made me a lot of freakin money. It just has. I really think that that’s very worth paying attention, what we’re going to talk about. So for me, I was a member of the Motley Fool community for…. I’ve been in that community for like, 20 years. I noticed that I seem to have like my own personal – I can’t do math. Now, I don’t even know what long division is. I’m mathematically challenged beyond comprehension. So I always figured I must not be good at investing because I don’t know math. I also am not a tech expert. So I don’t even know how like the internet works, or how my phone rings or any of that stuff. But I noticed that I seem to always gravitate toward winning stocks. And I at one point had, um, there was like, 10-15 years ago, I had, like, 40% of our portfolio and Amazon and Netflix, because I thought Bezos and Hastings, I thought these were great companies. I couldn’t imagine how they would lose. So long story short, a financial planner talked me out of doing my own investments. He said, I couldn’t possibly understand this stuff. I actually had a conversation with a noted podcast, podcasts are in finance. And I was I was pitching him an idea to develop his book. And he told me, you’ll never be a good investor. I have all the brilliant analysis. And I have teams of guys analyzing stuff. So these two guys convinced me that I couldn’t possibly be good at this. And I sold all my stuff. And I hired a planner, and I paid him all kinds of money. And then about maybe seven years later, I looked at what my portfolio was without him, and I compared it to what I I had with him, and I’m paying this guy 10s of 1000s of dollars, if not more, and I annihilated him if I had kept my portfolio. I mean, I’m talking about like, over a million dollars, which for me is no joke. I mean, I’m half a starving artist.
Matthew Cochrane 13:29
Right, right right. (laughs)
Daniel Joshua Rubin13:31
I was furious. Nobody had bad intentions. No, they really believe what they were saying. I really don’t think it was an evil thing. I just.. so I fired them. And then I took over my own portfolio. And and in the last three years, where I got really dedicated to developing my method of what I call narrative investing, which I mixed with a lot of other brilliant investors like yourself, where I get my picks, is my results have been, like, unbelievable. I’m up over – I think I’ve like tripled our portfolio in the last three years. And it’s a huge deal. And I’ve done it by sticking to strict principles of what I’m calling, what we’re going to talk about, of narrative investing.
Matthew Cochrane 14:14
So let’s yeah, let’s talk about narrative investing. We’ve talked before, and you say there are three legs to the investment thesis tool. What are they and how does narrative investing fit into that?
Daniel Joshua Rubin 14:27
Sure. So obviously, you have financial analysis, you know, you have all the metrics, profit margins, accelerating growth rates, all those things that that are absolutely essential. And then obviously, you have the business and the tech analysis. Those are two critical legs of the stool, but then there’s there’s the intangibles, leadership, branding, cool factor, um, how inspiring the product is. You know, logos colors, all color I’m analyzing the leaders. And that stuff is is very hard to quantify. And I think what what I am frustrated with as an investor have been is, and what I would consider the arrogance of value investors. But I do think this is changing now. And so I’ve known a lot of value investors, and you still see them all the time on Seeking Alpha and all these sites where they think they can come up with a definitive number that values a stock, which is ridiculous. It’s a dynamic thing. It’s always changing. And it’s based on human emotions. And but now you really do see that changing as well. I hope I’m pronouncing this right. aswath damodaran, who’s a famous value investor at NYU. And he, he, to his great credit, I think he’s a he’s a brilliant guy. And he works his tail off to to come up with his valuations. But he’s often been wrong. And he wrote a book called narrative and numbers, where he said, You know, I can make these numbers say anything I want, based on the stories I’m telling myself, and Robert Shiller who’s the Yale economist, who coined the phrase irrational exuberance. He wrote a book called I think narrative economics saying, we have to understand the narratives taking place in society, in industries and companies with people, you know, that there’s a national mood, you know, obviously, things were very different in the roaring 20s versus maybe post war, you know, post World War Two, and all these stories greatly affect the price of things. So I feel like a guy like me, is is very in tune with all this stuff. And that is, is the so for me, the the financial analysis and the tech analysis fit in kind of a wrapper, which is the narrative. And I look at the narrative as the third leg of the stool that wraps up the whole thing and helps put it into context and make sense of it.
Matthew Cochrane 17:02
Sure, sure. Absolutely. You know, I feel like we could just like talk about that for like the rest of the hour. Okay, we’re talking a lot about stories and stocks, and we hear the term story stock all the time. Is that what you’re getting at? Do you invest in quote, unquote, story socks? Is there a difference in investing in stocks with great stories? And story stocks?
Daniel Joshua Rubin17:23
Its a great question. It gets right to the heart of what we’re doing. A lot of people get almost angry at the idea of a story stock. And one of my main missions as an investor is to create a new definition of what a great story stock really is. So the negative perception of a story stock implies that people are thinking emotionally, that they’re, they’re not really studying the business that that maybe they’re inspired by the mission or the charisma of the leader. So I wrote a long post not long ago, about a company called Solazyme and Solazyme, like six years ago, they were going to they had bio fuel, they were going to, they were going to suck fuel out of algae. And they were going to make cosmetics and fuel and food additives. And the TAM was going to be like trillions of dollars, everyone was going to get filthy rich, and the thing went kablooey and went nowhere. And obviously, people were telling a full story based on dreams and drama and emotion. What I’m saying is a great stocks. A great stock story is really about that you believe it’s very simple for the company to do what they say they’re going to do. So I if I could I want to just talk about really quick, the difference between a great story like a work of fiction, and a great stock story.
Matthew Cochrane 18:55
Yeah, take the floor, man.
Daniel Joshua Rubin18:56
Thank you. So in a great story. I’ll just use Rocky or the Godfather as an example. Because everybody knows these. We want to see the hero suffer. We want to see everything. So here’s a key point. In any story, in the classic sense, you have a hero, and you have an object of desire. Rocky wants to win the heavyweight title. And when he realizes he can’t win, he just wants to go the distance because then if he goes a distance, he’ll know he’s not just another bum from the neighborhood. So a great story has a clear objective, but in a work of fiction, we want to torture the main character, Frodo Baggins and Lord of the Rings. That poor guy gets, he gets stabbed by like a giant stone Gollum. He gets bit by a spider. He’s he gets his finger bit off his birth. I mean, the guy gets tortured. And we love that. as investors. We don’t want that. We just want to basically the greatest stock story would be a guy who says I haven’t This huge machine, it gobbles up tons of money. And all I got to do is grab the money, and we go Boy, that, and then I’ve known how petition, and it’s really easy for me to defend those profits. So that’s a huge thing about about the difference between a classic story and a great stock story. And we want logic and cause and effect. And we want it to be defensible. A great story has a mathematical quality, we believe that that this guy doing this thing can achieve this great objective. And that’s what we want from our investments. We want to believe that, that whoever the CEO is or the or the leadership team, that they can do what they say they’re going to do. So that’s a big important point about stories, great stock stories, and, and properly defining what a great stock story is.
Matthew Cochrane 20:58
So do you think you can use a company’s narrative to see how it’s going to fare into the future?
Daniel Joshua Rubin 21:05
Absolutely. And again, I am not an arrogant jerk. But I’ve had a great run in the last, I think, 18 months, by far the best of my career, since I started believing in, in this in the ability to predict the future based on narratives. So in real life, you’ll see this all the time. And the reason I’m so passionate about story is it goes so far beyond what we talked about this already, but it really comes up in your regular life. Like I once had a friend who was a 40 something guy who decided that he was going to write young adult fiction for girls. And I was like, that’s never going to work. We know that you’re not a younger girl. You don’t know that, and it went nowhere. So anyway, that’s a simple example. But let me give you three quick stories really fast. Here’s a company I’m going to tell you about. That was a terrible story. And I looked at the story. And in about, I don’t know, 15 to 30 minutes, I was like, this is this is garbage. Anyone can see this is going nowhere. So the company was called Helios and Matheson. Helios and Matheson had an app that tracks crime and neighborhoods. And somehow, I don’t even know how I might be missing something. But somehow they got ahold of movie pass, right. And they decided they were a company that sells subscriptions to move it to go to the movies. And you get unlimited amounts of movie going for a ridiculous price. And the more they sold, the more they lost, and they kept selling millions and millions of subscriptions. And and somehow they were going to they were going to scale the business, reduce the offer, make it profitable, and make a ton of money. What really triggered me is I looked at the owner, the CEO at the time, and he had come from an industry of nutraceuticals, and multi level marketing, and he had like an energy drink. Everything about that story was absolute garbage. So I was on I was telling anyone would listen to me. Because that stock ran up I think around up to like 10 bucks a share on a really (inaudible) valuation.
Matthew Cochrane 23:26
It had its moment in the sun.
Daniel Joshua Rubin 23:28
It’s unbelievable. And I’m like, This is nothing. This is garbage. And now it’s like I think it’s like it’s worth literally I think like a 1,000th of a penny a share.
Matthew Cochrane 23:39
Did it officially go bankrupt? Or is it slowly..
Daniel Joshua Rubin 23:42
I looked it up right before I came on, and I’m not joking around. I really think the share price is like .0001 which is again, a mathematical challenge. I don’t even know what that is. But it’s not good.
Matthew Cochrane 23:52
There’s a there was a story of like, I think somebody shared this on Twitter, but like he was a city banker, and he bought a movie pass. So that after work if he didn’t want to go out of the city to his home, and then come back for his nightlife, you know, for for go to clubs or whatever. Like he would be so he bought a movie pass, he would go he would just pick a movie that been out a while and wouldn’t have a big audience. And he would just go there to take naps. And he did that every day after work. And I’m like, you know, that’s that’s like what when people are subscribing to your movie subscription to go take a nap like every single day like that’s, that’s probably a bad business model. It was terrible.
Daniel Joshua Rubin 24:29
So another one that was really interesting to me. Around June, I got an email from Fred Meyers. Great investor. And he said, Hey, Rubin, there’s two companies I’m looking at. One was Fastly, and one was Slack. But he was more interested in Slack at the time. He said, what do you think of these? So I looked at Slack. And if you look at the framework of the company, Stewart Butterfield, the CEO is indisputably a brilliant guy. He’s a philosophy major from Cambridge. He built this apparently incredible product. My wife uses it. My wife’s in high tech sales, she loves it. But I don’t use it, and I didn’t know it when I looked on the website, I was like, I don’t even get what this really is. It’s got like channels, and it’s, and they talk about is a replacement for email. And what the website says is that if you buy the product, you’ll see a higher return on communication. And I thought, I don’t really know what this is. And I don’t really know what it does. But obviously the product is loved, the CEO is a great guy. And look, it’s very important that people realize, when we’re trying to make great investments, we are talking about the best of the best of the best compared to the average schmuck. All these companies are amazing. I mean, Slack is a multi billion dollar company, and I have nothing but mad respect. But as an investor, I was like, this doesn’t feel to me like best of the best of the best. But it feels really good. And I predicted to my friend in the email, I said, this, what I think is going to happen with this is they’re gonna get bought by Microsoft or or Salesforce. And sure enough, that’s exactly what happened. And again, like my friend who was writing young adult fiction, I do think if you if you take out all the emotion and drama of life, and just look at the most basic things, life is often the most expected thing is what happens. So those two companies, maybe they’re kind of extreme examples, but it seemed utterly guessable to me that Helios and Matheson would go kablooey (and) that Slack would do good, but not great, and consider getting acquired. Good, not great. It’s great. I mean, it’s good that it happened. Are we on a 50% gain? We want, you know, our company, so 10, 20, 100x over? Sure. So anyway, so those are the that was a good example. And I mean, a bad example, and a mediocre example. I’ll talk about some some super winners, you’ll have to shut me up, because I have a couple of them that I’m like so passionate about right? Did you want to ask me anything there? Or should I?
Matthew Cochrane 27:16
Oh, no, no, let’s hear it. Let’s hear it.
Daniel Joshua Rubin27:17
You know, you’re feeling what my wife often feels, which is just the runaway train is just down the tracks?
Matthew Cochrane 27:24
No, we’re on the track. So let’s (laughs)
Daniel Joshua Rubin 27:27
Oh, so one of the things I’m absolutely a fanatic about in in story is simplicity. And this is just a critical point, that a great story is simple. So if you look at Hamlet, and I’m promise, I’m gonna get back to investing, Hamlet, the Godfather, Rocky Jaws, these are incredibly simple packages or frameworks of the narrative. Hamlet, really all that happens in Hamlet, which is arguably the most psychologically sophisticated, brilliant story ever told. But really, all that happens is a ghost shows up, he tells a prince, you got to kill the king, and the prince kills the king. I mean, there’s a long journey of him thinking about what he’s going to do and what the implications are of it. But really, that’s the framework in Godfather, they basically spend 25 minutes in the beginning of the film telling you, this guy’s a great guy. He’s powerful. He controls congressmen, he’s got tons of money. He’s just an amazingly powerful, he’s the most powerful criminal in the world. And then his power is challenged once a lot, so offers them a drug deal. And then he gets he basically gets shot and son has to take over. But again, simple. Simple stories. And in that simplicity, you can you can move the whole world. So now, one more quick point about why simplicity has value to us as investors, and as entrepreneurs and business people. It’s just common sense that if you can make the mission articulate the mission, clearly, you’re going to inspire your workers, your partners, your prospects, your investors, and because everyone knows what you’re doing, I was talking about Jocko Willing before drinking his, uh, his energy drink here fired me up, and he’s a Navy SEAL commander. And one things he’ll talk about is you have to make the mission clear to the soldiers. You have to say, take that hill, kill that terrorist, get back here. You can’t if you if you say to them, you know, take that hill, you know, then go and do this other thing, then do this other thing and bring it and go pick up these other guys. You’re adding so much complexity in the system. And the main point I really wanted to make about this is when I’ve been reading scripts by younger writers and new writers, which I do a tremendous amount of time. I’ve been amazed by how much story is damaged by adding in a character you don’t really need or adding in a mission or a storyline you don’t really need so famous story is that when Steven Spielberg was adapting Jaws. In In the book Jaws, Hooper Richard Dreyfus has an affair with Chief Brody’s wife. And Spielberg was like, who needs that? This is a movie about guys chasing a shark. And that’s, that’s plenty. So by staying focused, he made one of the great movies of all time. And it has all kinds of interesting implications that are still true today, especially in the age of COVID, where people don’t want to shut the beaches because they don’t want to hurt business.
Matthew Cochrane 30:39
Yeah, let’s actually so let me ask you about that. Because I think this is actually like the most, like, you gave me lots of notes. And we talked about investing for a long time. But I think this is the most important point you have. Like, when you look at Amazon and Jeff Bezos, for instance, like from the very beginning. It’s day one has been his message. It’s day one. We’re not worried about profits next quarter. We’re not worried about profits next year. We’re going to reinvest, we’re going to reinvest, we’re going to reinvest, and grow and grow and grow. And because he did that, from the very beginning, I feel like he attracted the absolute right shareholder base from the beginning. Like, you know, imagine if, like, in 2001, after the tech bubble, uh, you know, Carl Icahn had come in and been an activist investor said, the most profitable thing we have is like books, and, and, um, and DVDs, and that’s what we’re gonna stick to, we’re not going to grow because we can be profitable like this. Or, you know, I always think like, you know, but that never had a chance of happening because Jeff Bezos was so good at communicating the company’s mission, or the company’s ethos, if you will. It’s day one from the beginning, that he had the right shareholder base.
Daniel Joshua Rubin 31:55
Absolutely. And again, I think a such an important point is he realized, start with one thing, get people buying books online. Everybody loves books, it’s a passionate subject. And he got that rock solid before he moved on. And that does bring me to a really important point. My style of investing again, what I’m calling narrative investing. I’m never saying that other people are wrong. Like, I used to do that when I was a younger, dumber guy. But now that I’m in my 50s, it’s actually a super cool thing that you, you don’t have to be so extreme in all your thoughts. This is my style. I like there are companies that are have more complicated products and messages and complex financial services. And I’m not saying that those will definitely fail. I’m only saying that for me. The simpler ones are easier to follow. They’re more enjoyable for me to follow. And they’re within my, you know, Buffett circle of competence. Um, but yeah, there’s no doubt it but but, you know, because Bezos took that thing, oh, my God, where, you know, to like, layers of complexity.
Matthew Cochrane 33:02
Right? And then, you know, you just think like to like, um, you know, Blockbuster at a certain point was close to taking out Netflix, and they were right there on the cusp. And the thing that killed them was Carl Icahn came in and said, no, we need to do this, you know, you need to worry about profits right now. And they were, they weren’t selling the big term vision of like, what they could do. Like he was worried about profits the next couple quarters. Right. And like, I just wonder, like, if Blockbuster had been able to tell a better story, like could have that just like, stopped that whole thing from happening, you know, but like, that story never got told of Blockbuster, whereas it did get told at Netflix. And, and that was like, almost the entire difference right there.
Daniel Joshua Rubin 33:47
Absolutely. And without a doubt, there’s no no doubt in my mind. What Reed Hastings I’m glad we’re talking about him because he’s to me, he there’s, he’s the patron saint of narrative investing. I mean, he’s the greatest he, he knew from day one, he was going to sell flicks on the internet, Netflix, you know, rock solid. He he had that he had to start with DVDs by mail. And then he got rid of those. And he realized, all I have to do is create an app, put it on every device, get people to sign up, and I can get hundreds of millions of subscribers and generate billions in revenue. People were telling him that he should do licensing, merchandising, that he should have porn, video games. I mean, it was like there was so many ways for him to mess up that story. But he kept it as simple as it could possibly be kept, you know, and look what he built. Whereas blockbuster just had, they had the exact same product for a while they tried to copy it, but they had all those retail stores they were stuck with. So doing retail and doing apps by internet is a completely different thing. And what’s so important about this and to invest Is because Reed Hastings was so relentlessly focused on hiring the best developers and making sure the apps always work on every like, I have never. I have Apple TV. Every time I’m on another app, they asked me to log in, I got to go find my password. I got a deuce signed some code to activate it. I’ve been with Netflix like 20 years, I’ve never ever had a single problem. So that being an expert in that core competence is a competitive advantage. And that that I think, is just incredibly important.
Matthew Cochrane 35:36
Sure, why don’t I think tell your Shark Tank story? I think applies to this.
Daniel Joshua Rubin 35:43
Okay. Absolutely. So this is great. I love Shark Tank. I watch it with my daughter all the time. I just think it’s an incredibly valuable show for watching narrative investing inaction. So there were these two guys who came on to talk about their business having a party boat. They were silly guys. They had like Navy costumes. They were real clowns, but they were very likable guys. And they came on and they said that they have these party boats, and the party boats go out, they serve really great food. They serve champagne. People go out for a couple hours, get drunk, come home. And that’s it. And you can see the five investors were just laughing at them. And then Kevin O’Leary, Mr. Wonderful says, “well, how much money do you make on a party boat each year?” And they said 130 grand, and you saw all the investors like, whoa, this is a legit business. So you have one boat, if you come to us for the money, you’ll get 500 boats and you’re making real money. And so though it was done, like story is perfect, clean, simple, clear. You guys have the investment. But then they said, Wait, wait, wait, you’re missing the best part of it. And they were like, what, what’s the best part of it? And they said, our food is so good, we’re gonna serve the food in supermarkets. And you could see the guys like, almost laughing. And they’re like, so wait you’re party boats and you’re retail product. And they didn’t even understand anything about like shelf space and, and how it works to get those premium shelf spaces and advertising and blah, blah, blah. So then they said, but there’s one more thing, the piece de resistance of this thing. We’re going to end with a ride in Las Vegas. And and you just saw the Shark Tank guys cracking up about like the party boat ride, like where else to party than Vegas. Right? Right. Anyway, they utterly destroyed a great story. And this happens all the time, I think in businesses and you know, it’s I think this is the ballpark of diversification and Peter Lynch word.
Matthew Cochrane 37:48
It definitely reminded me of that too, just as you’re talking, like, but Okay, so Daniel, how do you tell the difference between like, diversification like that, or Amazon when they’re going from books to selling DVDs to selling everything on the internet, and then going into the cloud, and everything else? When is it like great optionality? And when is it the worst suffocation?
Daniel Joshua Rubin 38:12
Right? It’s funny that I think a great, I’ll talk about the stock that drives everyone crazy, good and bad. But I think that Elon Musk’s, the first story that he laid out for Tesla was, I’m sorry, I’m looking for it right now, I think was one of the greatest things I’ve ever seen. In as far as it’s honestly, I think it should be studied in business schools, his first blog post about Tesla, which is where I learned about it. And I promise this will answer the question of diversification model. Now, Elon Musk is such a brilliant, incredible human being, that it’s hard to really use him for anything but but this guy built a $500 billion company. And so much of it is fueled by there’s an investor who goes by the name Stock Novice, The Stock Novice, and he calls it the narrative premium. And this is the greatest example in business history that I know of, of narrow payment. So what he said is, we’re going to build a sports car. He said, we’re going to use that money to build a more affordable sports car, I mean, more affordable car, he said. Then we’re going to use that money to build an even more affordable car. And while we’re doing that, he said, we’re going to provide zero emission electric power options. And he did every single one of those things. He did the Roadster, he did the Model S. Now he’s doing the Model Y and he’s putting up those power stations everywhere. Now. It’s funny because what tripped me up was that was his story, and I thought it was flawless. And I could live with him building rocket ships on the side, even though it’s not my favorite thing to see a guy with two passions, but I got out a Tesla was he started digging tunnels. He started making flame throwers. He started dating, you know, like, like famous electronic dance. That woman Grimes, he was fighting with rappers. He called that guy in Thailand a pedo. Guy. Right, right. And that’s where I went out. I don’t know what to make of this. So for me, he got off the story. So I look at the story is like a narrative track. And things would fit on that track where you’re trying to, you know, revolutionize travel. I can live with a cybertruck I can live with a plane, maybe, you know, so but but I’ve heard Buffett talk about this, that Amazon, I don’t even know what to say about that. Because to be honest, I never thought that was possible. I didn’t think you could do all those things. So but for me, it’s if your mission is, is clear, and each thing fits in accordance with I mean, think about like Rocky, if you think about the movie, Rocky, he drinks raw eggs, he goes jogging at four in the morning, those are on the story. If he decided he want to open like a business with his grandpa, that’d be off the story. So I hope that kind of answered your question. Not sure. It’s either off track or not? And related to the mission?
Matthew Cochrane 41:17
Sure. Um, well, we did not say we were going to talk about this, but let’s talk about this. Okay, um, we disagree on the company quare. Yes. Okay. So let me I’ll say I see Square, and I see the story as we’re going to help small businesses fight against the big box retailers, we’re gonna give them the same bells and whistles that, you know, the big chains have, and we’re fighting for the little guy. But you, which is fine, but you don’t see that. So tell us where you are, I guess? You know, give me your side of it.
Daniel Joshua Rubin 41:57
Sure. That’s it? This is a great and really important question. And I want to give a shout out to all my friends who are over 50 now. (laughs) I really liked Jack Dorsey a lot, and how could you not respect all that this guy has achieved and what he’s able to do? And one of the big realizations I’ve made as an investor is that and I promise, I’m going to get to that. My big realization is that as an investor, you have to have your your core criteria. And I really believe it is better to let a great company make a lot of money, and not invest in it, even if you kind of believe in it, because it doesn’t fit your your, your core criteria. And when you get away from your discipline, that’s when at least in my life, everything has gone kablooey. So for me, in the back of my mind, to be honest, and maybe I’m being fake, because square has done really well. But I, I can’t have a CEO who’s not 100% committed to my mission. Again, Chief Brody killed a shark, that’s what I’m paying you to do. I’m not paying you to go messing around. I don’t want to watch the movie with an affair in it. And when you I just cannot get my head around how this guy works on Twitter in the morning, and a square at night. And no, I want you working 24 seven for my money. But he’s clearly able to do that with a great team. And so that was a big thing for me. But I do feel without a doubt in my mind. I know they’ve tried to sell Twitter, that square is his deeper passion. I know like when I think when Dorsey talks about living in Africa, I really believe he wants to help small business people have a version of the American dream. I think that’s where his passion is. And I know he tried to sell Twitter to Disney Iger talks about in his book. So the story of Square I like a million times better than Twitter for me.
Matthew Cochrane 44:02
But I agree with you there. Yes. And that’s where he is, uh, if you look at his ownership and his financial incentives, it’s it’s you know, it lies with Square more much more than Twitter.
Daniel Joshua Rubin 44:14
It feels in the story is so perfect. And to be honest, every time I go to a small business, and they have the Square payment system, I will ask about them just because it’s fun to talk about….
Matthew Cochrane 44:23
It makes my wife crazy. It makes my wife crazy. I’ll be like, well, how long have you had Square? You know, how do you like this?
Daniel Joshua Rubin 44:32
I mean, I have seen universal raves. And the things are really nice looking. I mean, they look great. And, and to be honest, if he ever sells Twitter, I will. I would be interested in revisiting that. I mean, you’ve taught me one of my favorite things about you is Messer. If I may quickly divulge.
Matthew Cochrane 44:51
If you’re going to compliment me, we can take it all the time.
Daniel Joshua Rubin 44:52
You really have a an expertise and a comfort with bigger stocks. My pea brain gets tripped up by just size and I think I’ve underestimated like, like that Apple and Amazon are like flirting with the trillions. It’s just hard for me to get my head around that. Whereas I like a nice 5 billion where I go, okay, I get it. Netflix is wherever when it was like 10 billion. I was like, okay, well, you had 100 million subscribers. But anyway, sorry. So I got us off track there for a second. ,
Matthew Cochrane 45:15
That’s all right. That’s all right. Um, well, you know, in sometimes I see those on those big companies like Microsoft, for example, or something like that, like, where we talked about, like, the perfect investment stories, this machine that just picks up money. And when I see like Microsoft, or like other big tech companies, I’m like, it’s almost like, what, that’s what they are. They’re just as big machine that keeps picking up money. And, you know, I’m, you know, granted you limit I think you limit your upside there. But I also think you, you limit your downside there too?
Daniel Joshua Rubin 45:55
Absolutely. And I’m a fanatic. I, for me, what really got me in big in the last 18 months is, for me, the software companies are the they’re just the best stories I’ve seen where you have giant margins. Once people start using, like, I use Microsoft Word, I’m never not using Microsoft Word, that’s never going to happen, I will pay the 100 bucks for the rest of my life. Do you know how a great a product would have to be to make melearn all those codes and things? It’s never ever happening in a billion years. That’s how I feel that all these these cloud SaaS stocks that you know, once you’ve installed, you know, Salesforce or CrowdStrike, or Cooper, whatever it is, good luck being the other guy coming in and saying, hey, guys, I need you to do something for me. Strip all that out, retrain everybody, because my thing is so much better. It’s just never going to happen, right? When these companies are watching everything you do, and saying, Oh God, they don’t like these features. They like these and improving the product. So that’s why for me, the narrative of these cloud SaaS stocks is so powerful. And the their ability to defend the moat is so massive, that I really just went all in on those and super concentrated right now.
Matthew Cochrane 47:15
Sure, and it’s been a great period for those stocks. Daniel, one more question. And again, something we didn’t discuss, but like, we’ve, we’ve talked many times online. And I know you’re a father. And this is something I’ve asked a lot of my guests, like, how did you impart your passion or any investing wisdom on to your children?
Daniel Joshua Rubin 47:41
It’s funny. I believe, like, and this is obviously a huge subject right now, but media literacy. I have one daughter, and they say the good Lord never gives you more than you can handle it. Got me right by us not having any more. But um, I always sit with her and try to we watch commercials or we’ll hear somebody talk. And I’ll say what what story is being told there? What is that person trying to do to you? And so that’s the biggest thing for me. I always try to get her to think who’s talking? Like hero, an object of desire is just everywhere. It’s in business. And it happens with her friends sometimes. So for me, that’s the big thing. Just always looking at what story is playing out who wants what, why and who’s trying to oppose them.
Matthew Cochrane 48:37
Well, Daniel, thank you so much for sharing. Let’s wrap up our conversation there. Daniel Joshua Rubin, the author of 27 Essential Principles of Story. I’ve read it, I love it. Daniel, where can people find you if they’re interested in following you?
Daniel Joshua Rubin 48:54
I’m on Twitter at my handle is at @DanJoshuaRubin. I have a website called Story 27, which I’m aggressively developing right now. And I have a little school if you happen to be in the Chicago area where when this COVID ends, which we all can’t wait for, is I’ll be teaching classes and hopefully developing some online programs and I consult on scripts when people have, like you were saying, when that moment comes, like everyone I meet has a novel or screenplay, and I think of it as like a bullet in a cowboys gut. Like until you deal with that bullet… And so I love working with writers on helping them get their story told.
Matthew Cochrane 49:36
Well, that’s excellent. And we will will link your site in the our company piece on our website where we post this podcast, Daniel, Joshua Rubin, ladies and gentlemen, thank you so much for coming on today and discussing investing with us again. I’m Matthew Cochran, lead advisor with seven investing and we’re here to empower you to invest in your future. Have a great day, everyone.
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